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Requirement
Question: BUSINESS FORM DOCUMENT
Solution
Sole Proprietorship
Description A sole proprietorship is a type of business entity which is possessed and run by a single person, and there is no legal supremacy between the business and the sole proprietor. A sole proprietorship is the easiest way to set up a business. (Chaudhary, 2016)
Two Advantages
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1. The manufacturing business doesn’t have to make any payments of corporate tax under the sole proprietorship business.
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2. The sole proprietor has the complete control of the business and has complete decision-making power in his hands.
Two Disadvantages
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1. The owner of manufacturing business is solely responsible for all the debts and liabilities incurred in the business.
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2. A sole proprietorship business entity has limited life expectancy, business dissolves with the death of a proprietor. In case the business is sold to heirs, business struggles to survive because of a new way of working with the owner.
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Liability If the sole proprietor is unable to pay the debts from the generated profit, his personal assets can be seized, as he is solely responsible for debts and profits. For example, if there is an installation error of cabinets the sole proprietor has to pay the debts solely and even his personal assets are not protected.
Income taxes The manufacturing business’s sole proprietor, reports all the income and losses on his personal income tax return account and the business is not taxed separately from the sole proprietor.
Continuity of the organization A sole proprietorship will end after the death of the proprietor. The personal representatives could sell the assets of the business, but the death of the proprietor impacts the value of the business's assets. A buyer would have to make sure, the relationship between employees and business would not get lost if the value of the business is to be maintained as a going concern.
Control The sole proprietor is solely responsible for all the decisions and day to day operations. The proprietor can hire the consultant just to seek expert advice but at the end, the decision is made by the sole proprietor only. (Steingold & Bray, 2001)
Profit retention The profits which incur from manufacturing wood moldings, hardwood doors, high-end kitchen cabinets, and specialty cabinets and bookcases for dens, home libraries, offices, etc. the sole proprietor can draw funds from the account of equity. And the profitability of business shows that the income of sole proprietor is greater than his expenses.
General Partnership
Description In general partnership, two or more people come together to carry on business with the common goal of making profits. The partnership is seen as one identity. The partners equally share the liabilities, assets, profits, etc. to carry out a business. ("Types of Businesses and Forms of Business Organizations – Accounting Verse", 2016)
Two Advantages
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1. If the manufacturing business enters into general partnership, then this can result in cost efficiency and effectiveness as the partners may know certain aspects to carry out the business.
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2. General partnership helps in providing skills, knowledge, etc. which will help the business to make more profits.
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3. Businesses under partnership do not have to pay income tax, profit and loss of the business are filed by each partner on his/her personal income tax return account.
Two Disadvantages
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1. As the decisions are shared, there are more chances of disagreements because decisions cannot be made alone and the consent of every partner is important.
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2. If the manufacturing business enters into a general partnership, the personal assets of the partners are still not protected, and the personal assets can be seized in case of debts.
Liability If the manufacturing business starts using general partnership form of business then also the personal assets of the partners are not protected and can be seized in case of debts and liabilities. For example, installation error causes huge loss, and if the debt is not paid off by the company's assets, then personal assets of the partners will be seized to pay the debts.
Income taxes In general partnership income tax is not paid, only tax return account or file is made, stating the profits and loss of the business and the tax return account, includes the details of the share of individual invested in business. (Cox, Hazen, & Cox, 2011)
Continuity of the organization Before coming into a partnership, the agreement is signed, including all the clause. For example, in case a partner dies, the company will dissolve, or his legal heirs will take his place. And if the company dissolves, the company’s assets will be equally distributed among the partners.
Control The decision-making power of day to day operations lies within the partners equally. For example, one partner has to make some changes in the delivery of manufacturing products of wood moldings, hardwood doors, high-end kitchen cabinets, etc. then he has to take a consent from the other partner, he cannot take any decision alone.
Profit retention The profits among the partners will be distributed based on their contribution to the company and this will affect the balance sheet of an organization. And the profits can also be shared equally among the partners. For example, one partner is taking care of the installation of cabinets, and the other is taking care of delivery trucks and maintains the delivery records. Then the partners will distribute profit among themselves according to their work.
Limited partnership
Description A limited partnership is related to the general partnership but under this type of partnership, there should be one general partner and one limited partner to carry out business. ("Limited Partnerships and Limited Liability Partnerships (LLPs) | Nolo.com", 2016)
Two Advantages
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1. If the manufacturing business enters into limited partnership then there will be no issues of turnover, the company will not get affected if the limited partner will leave the company and can be easily replaced.
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2. If the manufacturing business enters into limited partnership, then he can act as a general partner and the decision-making authority will lie with him only as he doesn’t have to get consent from the limited partner.
Two Disadvantages
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1. If the manufacturing business works as a general partner, then he will be liable for all debts and liabilities solely.
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2. In a limited partnership, a partner is legally and equally responsible for unethical actions and illegal activities are done by the other partner. For example, insider trading.
Liability If the manufacturing business enters into the limited partnership and the owner act as a general partner then he will be responsible for all the debts and liabilities solely, even his personal assets would not be protected, and the only risk for a limited partner is on his capital which he invested as a share in the business.
Income taxes The payment of income tax is similar to a general partnership in case of a limited partnership but in the case of a limited partnership, the limited partner doesn't have to pay taxes for self -employment.
Continuity of the organization If the limited partner dies then, another person will be appointed as a limited partner, and this doesn't require the consent of other partners. And if the general partner dies then the limited partner can still work in the company but if the only general partner dies then the limited partner is forced to leave the business.
Control The decision-making power lies with the general partners and the partners. The consent of the limited partner is not important, and if in case he takes the part of the discussion then it will affect the tax liability of a business.
Profit retention The partners will get the profit based on the share they invested or contributed in the business.
C-Corporation
Description C- Corporation refers to a corporation that is taxed separately from its owners. C- Corporation is differentiated from S-Corporation, which is generally not taxed separately from its owners. It is mainly seen as an individual identity, and the shareholder (owner) is responsible for the investment.("Corporation | The U.S. Small Business Administration | SBA.gov", 2016)
Two Advantages
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1. The shareholders cannot be liable for the debts as the corporation is treated as a different and separate entity. Therefore, their personal assets can be protected.
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2. It is very easy to raise capital under C- corporation as the corporation sells the stock and it attracts the investors, and they invest more in order to make a profit.
Two Disadvantages
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1. The main problem is of double taxation as the corporation is seen as a different entity, the tax is being paid from the corporation's end and from the shareholders end in the form of dividends.
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2. The shareholders who have more hold on the corporation's stock have more power and authority from the shareholders who have less hold on the stocks.
Liability The liability of shareholders is limited to some extent, and their personal assets can be protected because of the C- the corporation is seen as a separate identity so, the corporation is liable for all the liabilities and debts.
Income taxes The dividend is given to shareholders when the corporation deducts all the expenses of business and shareholders have to maintain the records of personal tax returns. But because of this double taxation takes place. But in the case of small businesses, double taxation is not a major issue.
Continuity of the organization Under C- corporation if one of the partners dies, retires, etc. then this will not leave an impact on the business and the business will continue further by other partners. Unless there is any limitation on the corporation.
Control The decision-making power is in the hands of the board of directors which are elected by the shareholders and the day to day activities are being dealt by the officers which are appointed by the board of directors.
Profit retention Profits are paid in the form of salaries, bonuses, etc., and the profit of corporation can also be retained in the business in order to pay tax penalties in future.
S-Corporation
Description S- Corporation is an entity which offers limited liability of a corporation and the corporation has 1-100 shareholders and provides income and loss to them in accordance with revenue codes. ("S Corporation vs. C Corporation | Forming a Corporation", 2016)
Two Advantages
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1. S- Corporation doesn't face the problem of double taxation as the taxation is done for shareholders only and not at the level of the corporation.
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2. The personal assets of shareholders are being protected and in the case of debts in a corporation, the personal assets of shareholders will not get affected only their investment is at risk.
Two Disadvantages
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1. There is a limit on shareholders between 1-100, and the shareholder should not have the ownership of foreign.
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2. The formation of S- the corporation is very critical and time-consuming as an article is to be filled and it also charges fees depending on the state.
Liability The shareholders are given limited liability by the corporation in case of debts and the personal assets of shareholders are being protected.
Income taxes S- Corporation doesn't pay taxes to the federal, and the shareholders have to maintain their personal income tax accounts as the taxes are given to them from the corporation.
Continuity of the organization There is a buy-sell agreement among the shareholders and if one shareholder dies, then the other can purchase the shares. And if the owner of S- Corporation dies then his shares will be distributed according to his will.
Control The decision-making power lies with the board of directors, and the shareholders only get some right to vote during merger, acquisition, etc. the majority shareholders have more responsibility and authority as compared to minority shareholders.
Profit retention S-Corporations distribute their earnings and incomes through the dividends to the shareholders. Income is taxed only once whether reinvested or distributed. S-Corporations are not entitled to accumulate earning tax, earnings are appreciated in an account of retained earnings and some part of it is kept with the corporation in order to pay the tax penalties in the future.
Limited Liability Company
Description The limited liability company is defined as a legal entity that provides tax benefits and limited liabilities of the corporation. And the company doesn't maintain the accounts of the tax return. (Kumar, 2016)
Two Advantages
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1. Under this, the owner of the manufacturing business gets the protection and the creditors cannot seize the personal assets of the owner.
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2. There is no problem of double taxation and the members maintain their personal accounts and pay taxes accordingly.
Two Disadvantages
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1. A limited liability company cannot become a public company and cannot be converted into a tradable stock company, difficult to raise capital.
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2. A limited liability company is costly in two ways:
Members face legal and filling fees that exceed the fees, required to set up a partnership.
Members can avoid self-employment taxes, resulting in a decrease in the bill of overall non-income tax.
Liability The owners, called as members of the company have limited liability as their personal assets are protected and the creditors cannot seize them in the case of debts and liabilities of a company.
Income taxes This type of company doesn’t pay any income taxes. Income is provided to the members and they make their personal income tax accounts.
Continuity of the organization In some states, the death of one owner results in the dissolution of the limited liability company or the other members will agree to elect another owner for the company so that the company should not dissolve.
Control The decision-making power lies in the hands of the board of directors and the day to day activities are being managed by the managing members of the limited liability company.
Profit retention The shareholders get all the profits and losses and they pay the tax based on their personal tax rate and the limited liability company doesn’t pay any taxes as an individual identity.
MEMORANDUM
TO : All Employees
FROM : ABC Manufacturing Business
DATE : August 24, 2016
SUBJECT : Limited Liability Company form of organization would be used instead of Sole Proprietorship in a manufacturing business.
After careful deliberation, it has been determined that there is a need to change the form of manufacturing business from a sole proprietorship to Limited Liability Company, as the business is expanding and there is a high risk for being sued because of risky finances, need to consider business liability insurance there is also a need to raise more funds so, we are adopting a new form of business i.e. limited liability company.
Being a sole proprietor, the liabilities and debts are paid all alone but in limited liability company, personal assets would be protected from those of the business. We have to adopt the limited liability company form of business soon, as we are close to the end of the year, we would have to file two tax return for each type of business. Therefore, we have to adopt this form of business before the end of the closing year. A limited liability company would end by the death or bankruptcy of the owner. Adding “LLC” to our business name, we can add instant legitimacy and authority. As people prefer to do business with an incorporated company. If the management changes, limited liability continues to exist. The problem of double taxation is avoided of profits and dividend as the proprietor is taxed on both the individual and corporate level when he enters into the corporation. The limited liability company doesn’t pay any income taxes and the members maintain their personal accounts for income tax. And as the fundraises, advanced training can be given to the employee in installing cabinets, etc. this will help the manufacturing business to provide the insurance policy to the employees. As the employees have to deal with the installation of cabinets, delivering the products by driving the loaded trucks and this may cause major accidents as well, etc. the employee do all the tasks by risking their lives.
Therefore, a limited liability company will help the manufacturing business to expand more as it will help in raising more funds and minimize the financial risk and will improve productivity and cost-effectiveness.
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Chaudhary, A. (2016). Retrieved 30 August 2016, from http://Proprietorship Firms: Advantages and Survival
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Corporation | The U.S. Small Business Administration | SBA.gov. (2016). Sba.gov. Retrieved 30 August 2016, from https://www.sba.gov/starting-business/choose-your-business-structure/corporation
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Cox, J., Hazen, T., & Cox, J. (2011). Business organizations law. St. Paul, MN: West.
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Kumar, A. (2016). Retrieved 30 August 2016, from http://Indian Partnership Act with Limited Liability Partnership Act 2010
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Limited Partnerships and Limited Liability Partnerships (LLPs) | Nolo.com. (2016). Nolo.com. Retrieved 30 August 2016, from https://www.nolo.com/legal-encyclopedia/limited-partnerships-limited-liability-partnerships-29748.html
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S Corporation vs. C Corporation | Forming a Corporation. (2016). BizFilings. Retrieved 30 August 2016, from http://www.bizfilings.com/learn/s-corporation-vs-c-corporation.aspx
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Steingold, F. & Bray, I. (2001). Legal guide for starting & running a small business. Berkeley, Calif.: Nolo.
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Types of Businesses and Forms of Business Organizations - AccountingVerse. (2016). accountingverse.com. Retrieved 30 August 2016, from http://www.accountingverse.com/accounting-basics/types-of-businesses.html
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